News Links: Is Denmark on Verge of Icelandic Style Crash?

Note, this first link builds on a story that Claus Vistesen first presented in June about Danish covered bonds. Niels Jensen took a different view in September. Punters are now taking their bets, with Danish CDS rising today as a result. The three posts on that issue are as follows:

Danish bank regulators, like many European bank regulators, took, in our opinion, undue comfort in the risk-weighted capital models of Basel II. Simplistically put, Basel II did away with ratios based upon tangible equity to total assets in favor of "new and improved" ratios that sought to risk-weight every bank asset. The impact of Basel II was two-fold: 1) it did away with non-risk-weighted asset ratios and 2) it allowed banks to internally risk-weight assets to model. In Denmark’s case, this led the banks and regulators to come to the following conclusion: by law in Denmark, you can form a bank with $8MM of equity capital and borrow (with government guaranteed deposits and wholesale borrowings) $992,000,000 to fund a $1BN residential mortgage portfolio of, as you will see later, largely one-year, floating rate, interest-only, single family mortgages and you’d be considered "well capitalized" by the regulators.

Gross domestic product contracted 0.04 per cent in the three months ending on September 30 compared with the previous quarter as weakness in the industrial sector spread to Brazil’s once vibrant consumer.

The prevailing view when the euro was established was that all that was required was fiscal discipline – no country’s fiscal deficit or public debt, relative to GDP, should be too large. But Ireland and Spain had budget surpluses and low debt before the crisis, which quickly turned into large deficits and high debt. So now European leaders say that it is the current-account deficits of the eurozone’s member countries that must be kept in check.

If they read and believed Citigroup economist Willem Buiter, there’d be a bit more panic right now. That’s because Buiter really thinks a breakup of the euro would be a global catastrophe resulting in years of economic horror, and the Europeans right now don’t seem to be particularly aggressive in trying to prevent that from happening.

Consider the dead bodies in this room: the costs of the REAL programs are not yet known, so any made money/lost money declaration is premature. In addition, the aggregate support, which comes out of more buckets than just the emergency lending programs, and the total support was necessary for the banks to be able to pay back the facilities they did pay down. How much of this operation is really tantamount to someone refi-ing their house (an analogy the Fed uses), except the nature of the inflows and outflows is masked by all the other action on bank balance sheets?

the Euro area is undergoing a real crisis and there is a huge need for an informed public debate on potential solutions. We don’t need academics making up fake crises and stirring intra-European resentments based on a misunderstanding of central bank arcania.

There will be no movement on the federal budget until after the 2012 elections. Does anyone really think it will be easier in an election year for either political party to agree to a compromise that its base doesn’t want and won’t support than it was this year when it was already virtually impossible? A better question: Why does anyone think that the intractable budget politics of 2011 that led to repeated failures on every budget-related effort will be any different next year?

Let’s cast our minds back to, say, October 3rd. 1990. An asymmetric shock (re-unification) struck the unsuspecting Bundesrepublik. The deficit, on the Maastricht definition, stayed below 3% until 1994 and then hit, hmmm, 9.5% of GDP in 1995. Gott in Himmel! The ECJ then pronounced that Germany was liable for ‘automatic sanctions’ and in 1996 ……

International Air Transport Association said the best possible outcome, based on EU governments ‘muddling through’ and resolving the eurozone crisis, would be for global airlines to generate total profits of $3.5bn

Citigroup Inc. will eliminate roughly 4,500 jobs over the next few quarters, or about 1.6% of its work force, as volatile financial markets and new regulations crimp profits. Vikram Pandit, Citigroup’s chief executive, disclosed the move on Tuesday afternoon at a Goldman Sachs investor conference in New York. Mr. Pandit said Citigroup would take a $400 million charge in the fourth quarter to cover severance and other expenses.

Spain’s incoming prime minister, intent on curing the country’s ailing banking sector, is considering cleanup plans that could dwarf the cost of previous efforts, including the creation of a state-funded "bad bank" to acquire toxic assets or a move to force banks to dramatically boost loan-loss reserves, people close to the situation say.

France will lose its AAA credit rating early next year regardless of last-ditch efforts by President Nicolas Sarkozy to resolve the euro zone crisis at an EU summit this week, a Reuters poll of economists showed on Wednesday.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.